The Reforms of Financial Policies for Promoting Innovative SMEs’ Access to Finance in Korea Soon-Yeong Hong Senior Research Fellow, Korea Small Business Institute [email protected]

Innovative SMEs are usually constrained in access to financial services. Therefore, enhancing access to finance of innovative SMEs needs government’s active role. The suggestions on the improvement of financing support system and the revitalization of technology financing for innovative SMEs are as follows. First, it is necessary to revitalize M&A to expand the financial market. Second, it should create and operate new technology investment fund. Third, it should ease the requirements to list the Inno-Biz on the KOSDAQ. Alternative proposals for promoting Korean innovative SME financing are follows. First is to activate the investments of venture capital funds to innovative SMEs in the early stage. Second is to activate bank loans to SMEs in the growth stage. Third is to activate regional SME financing by rearing regional financial institutions. Fourth is to activate the investments of private equity funds to innovative SMEs. Fifth is to activate SME financing from abroad.

Keywords: Innovative SME, Financial policies, Technology, R&D, Start-up

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INTRODUCTION The innovative SMEs can be, in general, defined as SMEs that can become the driving force of future growth and high quality of employment with the constant innovation. It has been reported in domestic and international studies that the performance of the innovative SMEs are better than the general SMEs in job creation, sales, R&D investment, etc. However, there is no legalized definition of innovative SMEs. The Korean government regards venture enterprises, Inno-Biz (technology-innovative SMEs), and business-innovative SMEs as innovative SMEs. SME policy in Korea began with taking steps to protect SMEs from large enterprises. Since the currency crisis of 1997, however, SME policy paradigm has been largely shifted to promote innovative SMEs for enhancing growth potential of national economy. However, innovative SMEs are highly constrained in their access to financial services. Therefore, enhancing access to finance of innovative SMEs needs government’s active role. The Korean government has provided various policies to create an environment where innovative SMEs can more easily access to finance. The objective of this study is to discuss the various policies which the Korean government has accomplished to promote innovative SMEs, and suggest the reform directions of financial policies and market environments that can increase innovative SMEs’ access to finance. This paper is organized as follows: Section 2 offers contribution of Korean SMEs to national economy. Section 3 overviews the features and characteristics of SME policies focusing on promotion of innovation and the SME financing structure in the Korean economy. Section 4 discusses the innovation related activities and systems. Section 5 introduces financing programs to promote innovation for SMEs. Section 6 recommends the policy directions for

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fostering innovative SMEs, the suggestions for revitalization of technology financing and the alternative proposals for promoting SME financing. The considerable portion of this paper is based on website materials of SMBA (Small and Medium Business Administration), Small and Medium Business Corporation (SBC), Korean Intellectual Property Office (KIPO), Korea Technology and Information Promotion Agency for SMEs (TIPA), Korea Institute for Advancement of Technology (KIAT), Korea Institute of Industrial Technology Evaluation and Planning (KEIT), Korea Credit Guarantee Fund (KODIT), Korea Technology Finance Corporation (KOTEC), Korean Federation of Credit Guarantee Foundations (KOREG), Bank of Korea (BOK), and so on.

CONTRIBUTION OF KOREAN SMEs TO NATIONAL ECONOMY Korean SMEs have been playing an important role in the nation’s economic growth through active start-ups and the creation of jobs. As the backbone of the Korean economy, SMEs represent

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No. of SMEs is about 3 million, 99.9% of whole enterprises as of 2009.

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No. of Employees in SMEs is 11.8 million, 87.7% of whole employment.

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Production by manufacturing SMEs is 47.6% of whole manufacturing industry.

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Value-added by manufacturing SMEs is 50.5% of manufacturing industry.

Especially, Korean SMEs made a great contribution to resolve unemployment problems by increasing the number of those employed by 2.9 million while that of large enterprises dropped by 1.1 million during the period from 1998 to 2007, 10 years since foreign exchange crisis of 1997. -2-

Table 1

Contributions of Korean SMEs to National Economy(2009) (Unit: each, person, billion US dollars, %)

All industry (1-299 employees)

Manufacturing (5-299 employees)

No. of establishments No. of employees No. of establishments No. of employees Gross output Value of Shipments Value Added

Total(A) 3,069,400 13,398,497 111,722 2,798,297 1,168 1,169 393

SMEs(B) 3,066,484 11,751,022 111,126 2,150,451 556 555 198

Ratio (B/A) 99.9 87.7 99.5 76.8 47.6 47.5 50.5

Source: National Statistical Office of Korea (NSO), Report on the Census on Basic Characteristics of Establishment and Report on Mining and Manufacturing Survey.

SME POLICIES AND SME FINANCING STRUCTURE IN KOREA Definition of SME In general, SME is defined to be an enterprise with less than 300 employees in manufacturing, mining, construction, transportation and large general retail stores, 200 employees in business support service, 100 employees in wholesale and product intermediation, and 50 employees in other sectors as table 2.

Features and Characteristics of SME Policies Focusing on Promotion of Innovation Definition of Innovative SMEs The Korean government intensively fosters innovative SMEs as a growth engine of the national economy by designating SMEs with technological competitiveness and growth potential as innovative SME. The number of Korean innovative SMEs is continuously growing through ceaseless technological development and the tripartite cooperation of -3-

industry, academia, and research institutes. Innovative SME is divided into 3 types of venture business, Inno-biz, and management-innovative business by certification criteria. Venture Company Certification: Small and Medium Business Administration (SMBA) designates qualified venture-type companies as 'Venture' Company' based on the Special Measures on the Promotion of Venture Companies, which was enacted in 1997. A venture firm is defined as table 3.

Table 2

Definition of Korean SMEs Small Business

SMEs Sector No. of Workers Manufacturing Mining, construction and transportation

Less than 300

Less than 300

Capital & Sales Capital worth $8M or less Capital worth $3M or less

Microenterprises

No. of Workers Less than 50

Less than 10

Less than 50

Less than 10

Large general retail stores, communications, and other computerrelated industries

Less than 300

Sales worth $30M or less

Less than 10

Less than 5

Seed and seedling production, fishing, electrical, gas and business support service

Less than 200

Sales worth $20M or less

Less than 10

Less than 5

Wholesale and product intermediation, R&D and news provision

Less than 100

Sales worth $10M or less

Less than 10

Less than 5

Other sectors

Less than 50

Less than 10

Less than 5

Sales worth $5M or less

Source: Article 2 of Framework Act on SMEs and Article 3 of Enforcement Decree of the Act.

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Table 3

C Criteria

Venture Company Certification Criteria

First phase

Second phase

Investment by Venture Capital

Venture capital holds minimum of 10% equity stake, and it is maintained for minimum of 6 months.

Investment in R&D

Minimum of 50 million Won in annual R&D expenses and 5-10% of revenue depending on the industry. Evaluation of Received good evaluation for business Technology and from venture evaluation organization in the Management Innovation following area.

Commercialization of New Technology

- Patent - Technology transferred from public institution - Technology developed with government investment

Source: SMBA.

Inno-Biz Certification: Korea has been implementing a technology innovation certification system since 2001 to support SME innovation. The assessment is based on 'Oslo Manual' developed by OECD. Application & Qualification →As companies defined as SMEs in the Framework Act on Small and Medium Enterprises, those which have been in normal operation for more than three years after establishment as of the application date. Selection Criteria (Online selfdiagnosis: preliminary assessment) → Assessment of technology innovation system (full mark: 1,000 points): 650 points or more. The assessment system consists of four fields (technology innovation, technology commercialization & technology innovation management capability and technology innovation achievements) and about 60 items. -5-

Main-biz Certification: SMBA is implementing Main-biz (Management Innovation Business) certification system, with assessment of management innovation capacity. The system, based on the Oslo Manual, is designed to foster SME innovation in marketing, management, quality movement, etc., which are essential to the enhancement of competitiveness. Main-biz assessment indices include → Leadership, Sustainable innovation, Human resource management process, Customer and market-oriented process, Production & service operation process, Production facility status (manufacturing), Measurement, analysis, and knowledge/information management. Korean SMEs have also endeavored to upgrade their productivity and create new values by innovating non-technological aspects of their business.

Policies for Promoting Innovative SMEs ■ Policy Framework of SME Innovation First, the Korean government has focused on enhancing the innovation capacity of SMEs according to their business type and growth stage. Policy financing has been provided for SMEs in their early stage. Second, the government has made a shift in SME policy to promote competition and cooperation. Third, the government is continuously creating a market-friendly business ecosystem and expanding its infrastructure. Fourth, the government has promoted the balanced growth of traditional markets. SMBA announced '5-Year (2009~2013) SME Technology Innovation Plan' at National Science & Technology Council (NSTC) Meeting held on August 2009. This plan aims to foster global SMEs through enhancement of technological competitiveness and to maximize R&D investment efficiency in accordance with a 'choice and concentration' strategy. Under -6-

this plan, SMBA intends: To increase SME R&D investment, allocate investments strategically, and expand demand-oriented technology innovation infrastructures; To focus choice and concentration on future promising growth fields, green technologies, new growth engines, and knowledge services; To strengthen custom-tailored support in terms of growth stage and innovation capability for global leader SMEs, innovative SMEs and SMEs in the start-up stage. As promotion strategies, meanwhile, SMBA suggests identification of promising technologies, planning and efficiency enhancement of R&D investment, increase of commercialization success rates, etc. For innovation-type SMEs, SMBA also plans to select 260 small business technology innovation groups and support the R&D activities in order to expedite creation of technological innovation achievements. After completion of the small groups' activities, SMBA intends to identify and award excellent enterprises that produce outstanding technological innovation results and also to hold a 'Nationwide Small Groups' Contest' with a view to spread a technological innovation atmosphere to all SMEs. ■ SMBA’s Core Policies for Promoting Innovative SMEs in the case of 2010 First, it should maximize job creation via biz start-up & employment. To do this, SMBA intends: To organize venture businessmen's special lectures on entrepreneurship at universities, accelerate start-up activities of professors, researchers and collegiate students, and improve the spin-off start-up system for executives and employees of large firms; To operate a 'homebased start-up system' and expand the infrastructure for one-person creative enterprises; To establish excellent SME/venture enterprise information database and nurture industryacademia manpower that are custom-tailored to work site demand. Second, it is necessary to stimulate economic vitality and enhance productivity. To do this, SMBA intends: To implement -7-

policy financing at an early stage, execute SME-support budget at an early date, expand purchase of new-technology products through support for R&D linked to supply & demand, diversify SME sales channels, and enhance product reliability; To enhance productivity and nurture manufacturing-based enterprises, improve three fields with weak productivity intensively, enhance energy efficiency, and spread green management.

Structure of SME financing: financing policies, policy related funds and institutions Problems of Korean SMEs Financing Korean SMEs used to experience financial distress due to a high ratio of bank loans(60~75%) in external financing when banks strengthened terms of loans and tightened money, confronting with the economic recession and the changes of economic conditions. As of 2010, the proportion of bank loans in external financing of Korean SMEs is the largest as 65.9%. Table 4

Ratios of Bank Loans to SMEs by Security (Unit: %)

Banks

Policy funds Non-banks Stocks

Corporate Private curb Overseas bonds loans

2005

72.2

22.7

2.8

0.0

0.3

1.3

0.8

2006

71.9

24.8

1.5

0.3

0.4

0.9

0.2

2007

74.3

21.7

2.1

0.1

0.4

1.2

0.2

2008

71.5

21.8

3.9

0.2

0.1

1.8

0.5

2009

62.1

30.8

3.1

0.3

0.8

2.8

0.1

2010

65.9

26.5

3.4

0.2

0.8

1.5

1.6

Source: Korea Federation of Small and Medium Business (KBIZ).

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In regard to term structure of bank loans, the ratio of loans less than 1 year in bank loans to SMEs is high as 65~75%. Thus Korean SMEs have financial instability and difficulty in investing in long-term equipment. In the types of bank loans to SMEs, real estate collateral loans are widely used. As of 2010, the ratio of real estate collateral loans is 44.7%; credit guarantee loans, 25.3%; credit loans, 16.3%. Accordingly, Korean SMEs, which do not have real estate collaterals or cannot get credit guarantee, have difficulties in raising funds. Financial institutions in Korea have a great difficulty in analyzing credit risk of SMEs when investments or loans are decided because they cannot easily access or get credit information on SMEs. For that reason, financial institutions in Korea require real estate collaterals or public credit guarantees to SMEs. Also, most of financial institutions respond uniformly and sensitively to economic fluctuations. Most of financial institutions in Korea invest and make loans based on the information about corporate financial affairs, preferring loan to investment. Even to start-up or early stage enterprises, funds are supplied on basis of real estate collaterals. Table 5

Ratios of Bank Loans to SMEs by Security (Unit: %)

Real estate

Credit guarantees

Credit

Others

2005

43.3

30.1

11.7

14.9

2006

46.2

22.9

17.2

13.7

2007

47.2

21.1

16.9

14.8

2008

44.3

26.7

13.8

15.2

2009

40.1

32.0

15.9

12.0

2010

44.7

25.3

16.3

13.7

Source: Korea Federation of Small and Medium Business (KBIZ).

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Korean Financial Support System for SMEs ■ Credit Guarantee Services

Primary objective of credit guarantee services is to enhance the financial accessibility of SMEs. Korea Credit Guarantee Fund (KODIT) mainly supports general SMEs; Korea Technology Finance Corporation (KOTEC) supports technology SMEs; and Regional Credit Guarantee Foundations (RCGFs) support regional small enterprises. Korea Credit Guarantee Fund (KODIT): KODIT is a public financial institution established in June 1976 under the provisions of the Korea Credit Guarantee Fund Act. The main purpose of the credit guarantee services is to enable promising SMEs without enough collateral to obtain funds and make smooth headway in the financial or business transaction. The objectives of KODIT are as follows. First is to lead the balanced development of the national economy by extending credit guarantees for the liabilities of promising SMEs which lack tangible collateral. Second is to extend credit guarantee services for the liabilities of promising enterprises which lack tangible collateral. Third is to stimulate sound credit transactions through the efficient management and use of the credit information. Korea Technology Finance Corporation (KOTEC): KOTEC was founded in 1989 as a nonprofit guarantee institution under the special enactment, Financial Assistance to New Technology Businesses Act. The mission of KOTEC is to contribute to the national economy by providing credit guarantees to facilitate financing for new technology-based enterprises while promoting the growth of technologically strong SMEs and venture businesses. Since its foundation, KOTEC has provided guarantees to SMEs that possess prominent technology and business prospects but lack of security for financing. In particular, more than 80% of the total

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guarantee amount was first provided to the companies which desired to develop or apply new technologies. Regional Credit Guarantee Foundations (RCGFs): RCGFs have been established in each city and province since 1996 to extend credit guarantees for micro enterprises lacking substantial collateral. RCGFs were established in accordance with the provision of Article 32 of the Civil Law. To strengthen credit support for micro enterprises, the Regional Credit Guarantee Foundation Act, a special law, was enacted in September 1999. Through RCGFs' services, promising micro enterprises can obtain financing from various types of financial institutions without tangible collateral. RCGFs of 16 provide management consulting services to micro enterprises to enhance their management skills and productivity. Korean Federation of Credit Guarantee Foundations (KOREG): The Objectives of KOREG are contributing to the development of regional economies by enhancing the sound development of RCFGs and by providing re- guarantee services for RCFGs. The major functions are advancing techniques related to credit investigation and methods of guarantees, cooperating with governmental, financial and other related organizations, providing of education and training for executives and employees of RCFG, and operating re-guarantee services for RCFGs. ■ Policy Fund Program As a subsidiary of SMBA, Small Business Corporation (SBC) supplies funds at lowinterest rate directly or through banks to support start-ups, facility investment, automation, and commercialization of technologies of SMEs. Maturity of loan is relatively long-term as 3~8 years.

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SBC is a non-profit, government-funded organization established to implement government policies and programs for the sound growth and development of Korean SMEs. To achieve its purpose, SBC operates financial and non-financial programs for SMEs. Through financial programs, SBC provides financing for SMEs to expand operations, develop new products, and convert their business structures. SBC provides SMEs with finance for venture firms in their start-up and early growth stages, finance for commercialization of intellectual property and R&D results, and finance for innovative SMEs in high-tech and low-carbon industry sectors to improve their competitiveness. SBC also provides SMEs with opportunities to improve their financial structure by converting loans to capital. With non-financial programs including consulting, training, marketing, and global cooperation programs, SBC supports SMEs to enhance their global competitiveness. ■ Others SBC invests in venture capital companies and cooperatives to improve investment climate to innovative SMEs. Venture capital companies and cooperatives invest in promising startups and venture enterprises. Other governmental ministries and local governments also manage various financial support systems for SMEs respectively.

Problems in Korean Financial Support System for SMEs Although Korean financial support system for SMEs highly contributed to enhancing the growth of SMEs under the financial system and practices that favored large enterprises on

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rapid economic development, policy inefficiency and negative side-effects have been disclosed because of following reasons. Credit Guarantee Service: The first reason is the direct performance of credit investigation and evaluation by credit guarantee institutions. In addition, it is due to the excessive dependence of both financial institutions and SMEs on credit guarantees. These caused obstructions in the growth of credit evaluation ability of financial institutions and in the improvement of the ability for SMEs to manage credits Policy Fund Program: It is focused on medium and high credit rating enterprises. It is also the credit evaluation based on corporate financial affairs. These resulted in insufficient support for start-ups, ventures and small enterprises, and lowering policy effectiveness. Investment Promotion Scheme: It is focused on the support for loans. It is also the management by institutions undertaking indirect financing supports. These caused insufficient support for start-ups and venture enterprises, and also performance of support.

Recent Reform of Korean Financial Support System for Promoting Investments and Loans to SMEs ■ Reform of Credit Guarantee Program The first is the extension of supports for innovative SMEs. For example, the credit guarantees to start-ups increase from 0.1% of 2004 to 10.0% in 2009 and the credit guarantees based on technology appraisal of KOTEC increase from 15.2% of 2004 to 60.0% in 2009. The second is the expansion of loan guarantees for which financial institutions are responsible. The third is the increase of credit guarantees over 3 years in maturity to encourage long-term loans of financial institutions. The fourth is the establishment of system - 13 -

which enterprises, financial institutions and government balance to bear finances. For this, it is necessary to increase the guarantee fee of enterprises and the contribution rate of financial institutions to credit guarantee funds. ■ Activation of SMEs Financing by Technology Appraisal The credibility of technology appraisal is enhanced by using the technology assessment results of exterior institutions when KOTEC evaluates the credit of technology SMEs. The new credit guarantee system sharing with enterprises profits as well as risks is also introduced. In addition, the loan procedure based on technology appraisal of Korea Development Bank is simplified. ■ Reform of Policy Fund System for SMEs It is the concentration of policy fund supports for innovative SMEs. It is also the extension of investments to innovative SMEs by utilizing 'Fund of Funds'. In addition, the support of policy fund to SMEs in which venture capitals invest is enlarged. At last, it is the compound support of investments and loans to regional SMEs for promoting balanced national development. ■ Activation of Financial Support by Market Mechanism The function of Korea Enterprise Data (the credit bureau specialized in SMEs) is enlarged by promoting the exchanges of information about SMEs among participating institutions. It is also to activate not only the listing of SMEs but also the issues of stocks and corporate bonds by SMEs through the reform of listing conditions, the improvement of disclosure, and accounting system. In addition, it is to activate SME restructuring through giving incentives to SME workouts by banks and eliminating the factors that obstruct workout. - 14 -

INNOVATION RELATED ACTIVITIES AND SYSTEMS: MARKET & TECHNOLOGY DRIVEN Patent Supporting System for SMEs The Korean Intellectual Property Office (KIPO) provides a patent evaluation service for SMEs so that they can use the results for getting loans to support SMEs having a high level of technology but insufficient assets for security against loans. To activate the patent technology transfer and trade, KIPO runs an on/off-line patent technology trade system. KIPO established a one-stop total service system that comprises various services from diagnosis of IP capacity of SMEs to commercialization of IPs. KIPO is providing IP education for SMEs to reinforce SMEs capacity in IP. KIPO has established a package of SME support programs and held on-site presentations on the programs since January 2009. A total of 13 on-site presentations were made, which had more than 1,500 CEOs and IP workforce of SMEs. KIPO has established regional IP centers to strengthen the IP capacity of regional provinces since 2004. It conducts a comprehensive IP consulting service so that regional SMEs can upgrade their product brand images and relevant IP. Consultants of each center specialized in patent information analysis and commercialization of patent serve the regional needs. They provide one-stop service covering all aspects of technology development and commercialization. A patent commercialization consulting service matches potential licensees with potential licensors for a successful technology transfer by utilizing KIPO’s database. KIPO has provided various programs for local brand value improvement. KIPO began the pilot program of brand development for SMEs to help increase penetration in the non-English speaking markets in 2008.

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Technology and R&D Supporting System by Government-related Organizations Korea Technology and Information Promotion Agency for SMEs (TIPA) The TIPA was established in May 2001 as a quasi-government institute under the SMBA. TIPA is specialized organization to support SMEs in the areas of technology development, promotion of SME management innovation, and ICT promotion, with an aim to actively cope with a changing competitive environment and to dramatically improve the innovation capacity of SMEs through technology innovation and ICT. To achieve these goals, TIPA has conducted a variety projects, including technology and management innovation, establishment of ICT infrastructure, evaluation on consulting services, SME research & analysis, education & training for SME experts, and support of SME innovation in the APEC region.

Korea Institute for Advancement of Technology (KIAT) The KIAT was established in May 2009 as a quasi-government institute under the Ministry of Knowledge Economy (MKE). KIAT is playing a crucial role in suggesting R&D strategies for industrial technology through systemic technology planning and policy research to promote Korea’s industrial development and industrial technology innovation. It is also strengthening the competitiveness of the industrial technology ecosystem in Korea by promoting various activities such as transferring and commercializing industrial technology, establishing an industrial technology infrastructure, supporting parts & materials industries, and regionally specialized industries. KIAT is going to establish systems that will improve

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the technological innovation competency of individuals, corporations, research institutes, and the government, as constituents of the technological environment. Its functions and roles for SMEs are as follows. Commercialization Support: KIAT identifies excellent technological assets and manages a global technological information service network for the commercialization of technology and the effectiveness of investment in R&D. It provides funds for technology commercialization in the future growth driver fields, and encourages the growth of global technology-based corporations by linking them with technology funds. KIAT promotes business-oriented networks of corporations, universities, and research institutes to transfer and commercialize technology for public use. It also supports the utilization of intellectual property rights. Infrastructure Support: KIAT improves the competence of engineers and researchers on the scene and fosters manpower to meet the demands of the future. In addition, it increases technology-friendly awareness towards people and boosts the pride of researchers and engineers.

Korea Institute of Industrial Technology Evaluation and Planning (KEIT) The KEIT was launched as the amalgamation of six previous R&D funding organizations by the MKE in May 2009 to keep the government's promise of innovating the state department and its agencies. KEIT is a state of the art technology think-tank charged with the missions of policy research, R&D management, technology assessment and international cooperation. KEIT performs comprehensive planning and evaluation for the diffusion of a technological base through the pursuit of domestic and international synergy. Its role is to support technology planning and implementation and to act as a catalyst to expand technology infrastructure. KEIT is taking the initiative to create technology for the future - 17 -

through establishing industrial R&D support systems on the foundations of customer service, efficient utilization of R&D, and the achievement of a high level of expertise in industrial technology planning, evaluation and management. KEIT is playing a pivotal role in supporting industrial R&D projects; seeking out emerging technologies that can be modified to have practical applications for the real world.

Technology Commercialization Policies and It’s Performance The Korean government enacted the Technology Transfer Promotion Act in 2000 to promote technology commercialization in universities and government research institutes. Shortly after the enactment of the Act, most of Korea’s universities organized new managing teams and established technology licensing offices (TLO). This law was slightly modified in 2005 and explicitly indicates that the rewards to inventors should be more than half of the technology royalties. Despite this new law and government support, the performance of technology commercialization is still below expectations. The Korean government amended this law as the Technology Transfer and Commercialization Promotion Act in December 2006. This new law includes most of the policies regarding technology commercialization of universities and public research institutes. As technology transfer and commercialization is inactive, the Korean government supports a group of TLO organizations in building a consortium to overcome limited stock and experience within each TLO organization. The combination of government policies and intensive competition among public research institutes and universities for government’s research grants has influenced the intellectual property and technology commercialization. The changes of research activities in public research institutes and universities have resulted - 18 -

in a rapid increase of domestic and international patents and technology licenses with royalties. The ratios of technology transfer in total increased from 20.3% of 2005 to 27.4 % of 20071. Despite the rapid increase of technology commercialization, however, there are large performance differences between research activities and universities in Korea. According to a recent survey(2010) of 131 Korean universities, only 40 universities (30.5%) have more than one patent and 58 universities (43.3 %) have recorded at least one technology licensing contract with industry licensee. This indicates that Korean universities are still underperforming in technology commercialization.

Situation of Business Start-ups Based on Technology & Innovation SMBA's main task is to cultivate a business environment that encourages, nurtures, and grows new business start-ups, especially for those based on technology & innovation and generates Korean can-do spirit-based entrepreneurship. To promote business start-ups on technology & innovation, jointly with Korea Technology Credit Guarantee Fund (KOTEC), SMBA selects SMEs that are less than seven years since start-up and expected to show excellent growth potential after succeeding in commercialization of new-tech or promising products. To spread the start-up fever throughout society and accelerate technological start-

1

Ministry of Knowledge Economy did not published Technology Transfer & Commercialization White Paper after 2008.

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ups, SMBA has selected, awarded, and supported excellent technological start-up SMEs as 'Technological Start-up Leader Enterprises' in the first and second half of every year since starting the program in 2008. SMBA plans to publicize the technological start-up success practices of the selected excellent enterprises and support them further by holding investment marts, etc., in addition to presenting them with SMBA Administrator's prize. As mentioned above, ‘5-Year SME Technology Innovation Plan' aims to foster global SMEs through enhancement of technological competitiveness and promotion of new business start-ups based on technology & innovation. SMBA is promoting the spread of the research results of public research institutes to technological start-up SMEs. As of 2010, business start-ups based on technology & innovation are 46,044 enterprises: venture firms of 24,645, Inno-biz firms of 16,243, management innovative business (Main-biz) firms of 16,642. Table 6

Trend of Start-ups Based on Technology & Innovation (Unit: each)

1998~2005

2006

2007

2008

2009

2010

Venture

9,732

12,218

14,015

15,401

18,893

24,645

Inno-biz

3,454

7,183

11,526

14,626

15,940

16,243

Main-biz

-

2,619

6,510

11,324

13,988

16,642

13,186

22,020

32,051

41,351

48,821

57,330

2,455

5,006

7,650

8,988

9,735

11,486

10,731

17,014

24,401

32,363

39,086

46,044

Sum (Overlap) Total Source: SMBA.

Situation of R&D Institute and Research Personnel in SMEs Korean Government enacted the Technology Development Promotion Law in 1991 to promote the establishment of the industrial R&D Institutes in companies. This has been the major contribution for the industry in putting a heavy emphasis on the R&D activities, - 20 -

leading a huge increment in the number of industrial R&D centers. Benefited from several incentives such as the likes of taxation exemption, tariff reduction, and the military service exemption for their own R&D personnel through this special law, together with an increased awareness on the R&D, growth in industrial R&D institutes has become the driving force to put Korea as R&D powerhouse globally. As such, the policy to promote the establishment of the industrial R&D Institutes in companies has borne the remarkable results, especially in SMEs, as below. The number of R&D institutes in SMEs increased rapidly from 10,894 of 2005 to 17,703 of 2009 and the number of researchers in SMEs increased largely from 90,601 to 131,031 during the same period. As of 2010, the ratio of SMEs to total enterprises in the number of industrial R&D institutes was 94.8%. Table 7

Trend of R&D Institutes and Researchers in SMEs (UNIT: each, person, %)

2005

2006

2007

2008

2009

2010

No. of

Total(A)

11,810

13,324

14,975

16,719

18,772

21,785

R&D

SMEs(B)

10,894

12,398

14,014

15,696

17,703

20,659

Institute

B/A

92.2

93.1

93.6

93.9

94.3

94.8

No. of

Total(A)

163,646

179,709

193,340

209,137

219,975

235,596

SMEs

90,601

100,595

111,348

122,944

131,031

141,080

B/A

55.4

60.0

57.6

58.8

59.6

59.9

researcher

Source: Korea Industrial Technology Association (KITANET).

Situation of Business Incubating Activities The SMBA supports Business Incubators operated by universities and research institutes equipped with facilities and equipment that can support would-be entrepreneurs or new SME founders. This program is designed to promote the survival and growth of newly established venture companies. SMEs are provided with land, an expert consulting service, marketing - 21 -

education, and other support. This program began to be funded by government in 1998, which bore some costs for establishing BI center at university, national and public research institutions. SMBA has increased the number of BI centers to create jobs. As of 2009, there were 279 BI centers, which accommodated 4,727 enterprises and graduated 6,705 enterprises. Table 8

Situation of Business Incubating Activities (Unit: each)

2005

2006

2007

2008

2009

Universities

224

223

226

SBC

7

7

7

Institutes

15

16

22

Local Government

7

8

11

Others

13

14

13

Total

266

268

279

Occupied firms

4,441

4,532

4,727

Graduated firms

4,887

6,225

6,705

Source: Korea Institute of Startup & Entrepreneurship Development (KISED)

FINANCING PROGRAMS AND COMPLEMENTARY SYSTEMS TO PROMOTE INNOVATION FOR SMEs The Korean government is pursuing consistent and sustained efforts to expand innovative SMEs' access to capital, opening funding channels that have been traditionally closed to them. SMBA's indirect SME financing programs are focused on helping innovative entrepreneurs to set up or expand operations, develop new products, and invest in new staff or production facilities. The ultimate objective of innovative SME financing programs is to maximize the SME financial pipeline and bridge the financing gap. - 22 -

Development of Technologies: Expanding New Growth R&D Investment The Korean government continues to encourage R&D investment copying with the contraction of SME investment potential following the economic slowdown and strengthen strategic support for SME R&D. SMBA provides financing for innovative SMEs in high-tech and low-carbon industry sectors to improve their competitiveness through SBC as stated above. If SMEs share intellectual property rights jointly with universities and research institutes, technology license fees will be supported. Moreover, the government is driving a 5-Year SME Technology Innovation Plan, which encompasses continuous expansion of SME R&D investment, support for technology innovation R&D by capability and cultivation of global leader enterprises, intensive technology development support for expansion of future growth engines, and development of SME-type green technologies, activation of technical start-ups, etc. The Korean government established the Korea Small Business Innovation Research (KOSBIR) Program and has conducted the program since 1998 to offer government-wide support for SME technology innovation activities. In KOSBIR, 18 agencies including 12 government agencies with massive R&D budget and 6 government investment agencies provide more than 5% of R&D budget to SMES. The Korean government has also accomplished the SME Technology Innovation Development (TID) Program to promote technological innovation of SMEs which have inherited R&D capacity and enhance technological competitiveness by supporting costs for developing new products. SMBA undertakes the tasks in 1 year or 3 year project. The central government supports 50% of the cost of technological development and local government provides 25% of the cost. After conducting this Program, SMBA receives back 30% of its contribution as technology fees in installment for 5 years. Regarding the progress of program, - 23 -

SMEs have bombarded SMBA with requests for technological development due to their lack of finance and workforce in a rapidly changing technological environment.

Development of Information and Digitalization As stated above, SMBA is supporting the information promotion of SMES through TIPA. The SMBA also helps SMEs enhance their productivity through digitalization. Digitalization measures include the assessment of the SME digitalization level, provision of the comprehensive consulting for digitalization to SMEs, and the digitalization facilities for SMEs. In the projects to help SMEs to encourage the digitalization, there are the SME Production Digitalization Project, Total Information Management Providers, and Cluster for Digitalization Innovation Project. The Cluster for Digitalization Innovation Project, supported by SMBA, is designed to establish a broadband internet infrastructure and internet network in an effect to lay the foundation for digitalization in the cluster. The main propose of project is to accelerate the digitalization of SMEs in economically poor areas.

Technology Commercialization: Translating Technology into Commercial Success Believing that the future of the Korean economy depends on the technological powers of its SMEs, SMBA has made the promotion of technologically innovative SMEs as one of its most important policy initiatives. The focus of SMBA's technology policies includes the reinforcement of industry-academia-research institute networks, commercialization of developed technology. SMBA provides SMEs with financing for the commercialization of intellectual property and R&D results through SBC. SMBA provided about 36.3 million U.S - 24 -

dollars in technology development funds in 2009 to support commercialization of excellent technologies developed by SMEs and public research institutes. The support funds were provided without collateral or interest. From this project, SMBA expects such effects as reduction of development expenses, shortening of development period, technical exchange, etc. SMBA has also supported technology commercialization of SMEs through KIAT as mentioned above. As the technology development environment is changing from development of single technologies to the development of cooperation-type fusion & complex technologies and the importance of technology transfer and commercialization is increasing, SMBA is promoting a C&D (Connect & Development) form of technology development to expand common development projects among enterprises and also to spread the research results of public research institutes to SMEs. SMBA also plans to operate an R&D coaching program in order to achieve successful commercialization with introduction of external technological sources.

Knowledge Service: Commercialization of Knowledge Service Ideas SMBA has strengthened its support for commercialization of ideas in the knowledge service fields in an effort to activate start-ups by young persons and create new jobs. Since its announcement of model businesses for cultural content in March 2009, SMBA has promoted activation of one-person creative enterprises. In 2010, SMBA is intending to identify and select about 100 excellent cultural content ideas in nine business types of the cultural content field, including cartoons, games, characters, animations, movies and broadcastings, and in the IT field. For the 2010 tasks, SMBA intends to support their commercialization and also intends to increase the scope of support and budgets on a step-by-step basis. - 25 -

SMBA plans to actively help those enterprises that succeeded in commercialization to secure sales channels in linkage with App Store (Application Store), a mobile-based emarketplace that is growing rapidly of late. While supporting the success of commercialization through diverse methods, such as publicity utilizing public media including broadcasting, investment inducement and holding of purchasing consultation meetings, SMBA will pursue policies in a direction to become substantially helpful for startups with excellent ideas.

Creation of Venture Business Revitalizing & Globalizing Venture Businesses as New Growth Engine SMBA continues to promote the venture sector as a new growth engine. SMBA provides financing for venture firms in their start-up and early growth stages through SBC. SMBA is also pursuing policies that support the globalization of ventures through the establishment of small business development centers abroad, Global Star Funds and other programs. To stimulate active M&As among venture businesses, the SMBA has implemented various policy measures, especially relaxing regulations which include a simplified procedure regarding small-scale stock exchanges, corporate value assessment by certified institutions, a streamlined procedure regarding M&As and business transfer, replacement of a stockholders' meeting by an executive board when shares traded are less than 50% of the total. Also, tax benefits have been expanded regarding stock trades and M&As.

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Strengthening Venture Investment to Raise Growth Potential Venture capital investment continued a growth trend that began in 2003. Due to the recent financial crisis, however, investment results have been sluggish. SMBA is supporting a creation of private fund through its investment in the Fund of Funds and with inducement of investment through fiscal administration and additional investment from foreign and private funds. The Fund of Funds: The Korean government created the Fund of Funds to promote the establishment of investment funds for innovative SMEs and venture businesses, thereby expanding the supply of investment. Korea Venture Investment Corp (KVIC), incorporated in 2005, is the government-backed management company of the Fund of Funds. KVIC invests in top tier funds in a broad range of asset classes from venture capital to mid-cap buyout funds in Korea. Since its establishment, KVIC has invested in various industries including ICT, Life-science and clean tech. Furthermore, SMBA plans to encourage venture capital investment by overseas funds, oil money, etc. To do this, it intends to allow joint fund operation between overseas investment institutions and domestic venture capitalists, while providing preferential treatment by increasing the investment equity ratio for foreign funds to 50% from the present 30%. SMBA also created a small unit venture ecological system that integrates the capabilities of newborn venture companies (technology) and leader venture companies (market). Under this system, SMBA intends to create a lot of funds and support joint R&D and overseas marketing for IT. After revision of the Special Act on Ventures in October 2009, SMBA is propelling a support program for medium-size venture companies that can grow into global venture enterprises after graduation from venture start-up. SMBA also intends to expand the advance of domestic enterprises into U.S. procurement markets. - 27 -

Entrepreneurial Education & Entrepreneurship To strengthen SME competitiveness, SMBA is pursuing initiatives that enhance entrepreneurship and promote start-ups as follows. To create a more nurturing environment for SMEs, SMBA introduced a system that evaluates the impact of regulations on SMEs and recommends solutions as well as an ombudsman system that will help SMEs solve specific problems in June 2009. ■ Entrepreneur Club The SMBA provides financial support and training for entrepreneur clubs at universities to expand their start-up mind-set and inspire their entrepreneurship. This program is designed to train college students as future entrepreneurs with creativity and pioneer spirit. ■ Entrepreneur Graduate School In order to foster start-up specialists through systematic and professional education, 5 universities and colleges have run pilot programs for entrepreneur graduate schools since 2004. ■ Biz-Cool for Teenagers To inspire teenagers' pioneering spirit and business mentality, 80 middle and high schools have implemented Biz-Cool pilot programs. About 20,000 students have participated in the program and in a variety of financial education courses that conduct case studies on selfmanagement, business start-up, business administration, and finance. The purpose of this program is to help them find their career and revitalize start-up activities.

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Business Models with Creative Work Invigorating Innovative Start-ups & Generating Entrepreneurship Aiming at generating a new vigor of the economy, SMBA has run various programs to prime innovative business start-ups across the country as follows. Business Incubator: Refer the description stated in previous section Start-up Course: Start-up course is an education program targeting would-be entrepreneurs or new SME starters, designed to improve their management capabilities and raise the startup success rate. Local universities and specialized institutions offer about 100 courses a year.

Vitalizing One-person Creative Enterprises The global economic landscape has been changing dramatically, shifting from an industrial economy into knowledge economy and again to a creative economy paradigm. This monumental change has generated a new era for individual entrepreneurs. Any person with a great business idea will be able to plug into a vast global network of interlocking marketplaces where they can quickly and easily assemble the right sets of business processes to succeed. In a plug-and-play economy, sourcing major business processes - design, animation, finance, scheduling, logistics, insurance, sales, marketing - will be as easy as opening the Yellow Pages. And this specification, automation and outsourcing of processes with global economies of scale will bring a huge growth in the number of strategies for assembling business. The number of potential business and marketplaces will grow exponentially.

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In advanced countries with developed IT technologies including the internet, one-person enterprises in the knowledge service field are taking the lead in business start-ups and job creation. The Korean government has promoted fast-track development of one-person enterprises. SMBA is propelling various policies to foster one-person enterprises as follows. Establishing and operating 'Idea Biz Bank' designed to collect and identify creative ideas; Improving restrictions for activation of business start-ups (5 laws and ordinances and 7 systems of 11 ministries); Supporting creation of demand for one-person enterprises; Strengthening the management stabilization support system for one-person creative enterprises.

Differentiation in Supply Chains SMBA has pursued various policies which facilitate overseas advance and the extension of supply chain for innovative SMEs & venture companies. Large enterprises and SMEs need each other in order to maximize performance and competitiveness. SMBA has promoted a win-win relationship and thus the construction of desired supply chain between large enterprises and SMEs. On April 20 of 2010, SMBA held an inauguration ceremony for the 'Private-Government Joint R&D Cooperation Fund' with the four big enterprises. From the fund, SMEs, which carry out development tasks desired by the large enterprises receive financial support up to 75% of total development expenses. As the fund is to be implemented in the form of investments, SMEs will have no burden for repaying principal and interest. If successful in technical development, SMEs are to receive a guarantee of stable sales channels for more than 2 years from the large enterprises that suggested the successful development tasks. - 30 -

The R&D project model with condition of purchase has become rooted as a representative win-win form of cooperation between large enterprises and SMEs. With participation of large enterprises continuing, private-government joint R&D funds are also expected to expand gradually. SMBA has helped globalization and overseas advance of innovative SMEs. To this target, SMBA provides links to networks at home and abroad to extend the benefits of value chain (or supply chain) and content convergence effects.

CONCLUSION (and RECOMMENDATION) Policy Directions for fostering innovative SMEs In the short term, it is necessary to set up the policy framework for supporting innovative SMEs. The policy framework for supporting SMEs is necessary to revitalize the stagnation and lay the foundation for productivity advance. The R&D budget should be increased by stages which is essential for promoting the innovative SMEs. It should be promoted to industrialize the innovative SMEs with potential through custom support followed by innovative capacity In the medium term, it is necessary to establish the innovative system for SMEs based on this policy support. It is better to devise ‘Development strategy for the next generation growth engine in SMEs’ in order to increase the importance of innovative SMEs. It should expand the innovative model into the entire SMEs and establish a foundation, based on technology, for ‘Innovative SMEs’ to face against the global competition. The innovative SMEs should be expanded dramatically by the integrated support policy over all ministries. It

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is necessary to create the conditions that enable the SMEs specialized in the production of parts & materials to export their products. In the long term, the innovative SMEs should be promoted to settle down as the driving force of Korean economy. It is crucial to create a growth ecosystem for market-friendly innovative SMEs, set up the innovative system for SMEs, and establish SMEs to be ‘global supplying source for parts & materials’. In the long run, it should be intensively supported so that the production and value added level of innovative SMEs are comparable enough with those of large enterprises. Consequently, it is necessary to strengthen the financial market and the system to estimate & guarantee the value of developed technology including the credit evaluation specialized in start-up SMEs. At last, the policy support can be effective under the circumstances that it is necessary to make an effort on innovation continuously even by overcoming difficulties to enhance the technology. Since it is hard to carry out new plans or strategies, they should be careful not to fall into this situation.

Suggestions for Revitalization of Technology Financing The critics on the supporting system for innovative SMEs are as follows. The first problem is loan-type technology financing. It is said that the loan is not made on the basis of the technology and thus it does not contribute technology development as much. In addition, it corrupts SMEs & venture enterprises from being autonomous and distorts the private financial market. The second problem is guarantee-type technology financing. It is indicated that KOTEC’s (Korea Technology Credit Guarantee Fund) monopoly/oligopoly structure placed a limit on the growth in the technology evaluation and exchange. The third is the - 32 -

investment-type technology financing. The investment sectors characterized by Fund of Funds have contributed to promoting innovative SMEs. But it does not play enough roles to invest for the future and attract the foreign investment. The fourth is the technology evaluation. The efficiency of the government's policy based on technology evaluation is falling due to lack of consistency/standardization and reliability in the technology evaluation. The suggestions on the improvement of financing support system for innovative SMEs are as follows. First, it is necessary to revitalize M&A to expand the financial market for private technology. It expands the inflow of private investment in that it helps cash R&D investment. Second, it should create and operate new technology investment fund. It revises the market failure and stimulates the private investment in terms of establishing the market-friendly financial system for technology investment. It directly invests in the technological innovation enterprises and the initial stage of new technology. It fortifies the information system to use the professional companies of private technology, to connect with diverse R&D programs, and to attract the private investment. Third, it should also ease the requirements to list the Inno-Biz on the KOSDAQ. Venture companies among the innovative SMEs receive benefits when listed on the KOSDAQ. But it is not easy to push to list for Inno-Biz companies because of the listing regulations.

Alternative Proposals for Promoting SMEs Financing Policies for Promoting Korean innovative SME Financing First is to activate the investments of venture capital funds to innovative SMEs in the early stage. To do this, it should be enhanced the financial stability of venture capital companies by inducing investment to venture capital cooperatives of large pensions and funds. Second is to - 33 -

activate bank loans to SMEs in the growth stage. To do this, it should be decentralized loan risks by developing of financial derivatives. Third is to activate regional SMEs financing by rearing regional financial institutions. It should be decentralized loan risks of regional financial institutions by expanding basic finances in RCGFs. Fourth is to activate the investments of private equity funds to innovative SMEs. To do this, it should be Induced the enlargement of scale in private equity funds by activating the participation of large pensions and funds. Fifth is to activate SMEs financing from abroad. To do this, It should be established a specialized organization that provides foreign investors and financial institutions with the information about innovative SMEs.

Policies for Promoting Asian SME Financing First is to establish or rear a credit bureau (CB) specialized in SMEs in each country of Asia and sharing credit information about SMEs across Asian countries. Second is to establish an international organization that collects information about innovative SMEs in Asia and provides information to the investors and the financial institutions in Asian countries. Third is to enhance the transparency of SMEs by introducing the accounting system of international standard in each country of Asia. Fourth is to establish an Asian common credit guarantee institution which can reduce the risks of investments and loans to innovative SMEs.

REFERENCES http://www.kbiz.or.kr. http://www.keit.re.kr. - 34 -

http://www.kiat.or.kr. http://www.kibo.or.kr. http://www.kipo.go.kr. http://www.kised.or.kr. http://www.kobia.or.kr. http://www.kodit.co.kr. http://www.kitanet.or.kr. http://www.koreg.or.kr. http://www.k-vic.co.kr. http://www.mke.go.kr. http://www.sbc.or.kr. http://www.smba.go.kr. http://www.tipa.or.kr. Korean Government, Framework Act on SMEs and Enforcement Decree of the Act. Ministry of Knowledge Economy, 2008 Technology Transfer & Commercialization White Paper, 2009. National Statistical Office of Korea, Report on the Census on Basic Characteristics of Establishment, Report on Mining and Manufacturing Survey, 2011.

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